Emerging Markets, Converging Fears

Authors: Jayshree Bajoria, and Lee Hudson Teslik
November 6, 2008

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As the current financial storm spread from a U.S. housing market problem to a credit crisis to a full-blown economic hurricane, its impact on emerging markets was initially confined to share prices. Equity indices in the so-called BRIC nations (Brazil, Russia, India, and China), which experienced a heady run-up from 2005 through 2007, all suffered losses far greater than their counterparts in western Europe and the United States. Despite these losses, many analysts assumed until recently that the underlying economic growth in these countries would continue. New economic data is forcing them to reconsider this notion, however, and raising the question of what a speed bump for emerging market growth would mean both economically and politically.

China brought these fears into focus in mid-October when it announced third-quarter economic growth of 9 percent (FT). Such growth may look strong compared with the prospect of shrinking economies in the United States or Europe, but this was China's lowest growth rate in five years and a dramatic comedown for one of the world's hottest economies. The new global economic outlook report by the International Monetary Fund (IMF) tells the same story, but more broadly. The report projects growth in developing Asia as a whole to fall from 9.3 percent in 2007 to 7.1 percent in 2009, and similar trends across most of the world's major emerging markets. Specifically, it estimates:

India's growth will fall from 9.3 percent in 2007 to 6.9 percent in 2009;

Russia's growth will also decline, from 8.1 percent to 5.5 percent over the same period;

Brazil's economy will slow from a 5.4 percent to 3.5 percent; and

Mexico will drop from a 3.2 percent growth rate to 1.8 percent.

Will these declines prove a momentary blip in a decades-long growth trajectory, or will they spiral into something more worrisome? The answer, many analysts believe, will depend on how low growth falls, and in which countries. China, for instance, is home to over 150 million people living below the poverty line, and is sitting on several potential political land mines-unrest in Tibet and Xinjiang Province among them. The government has attempted to keep a tight rein on political dissidents, but CFR's Brian P. Klein writes in the Far Eastern Economic Review that unrest could spike if the country's growth rate falls below 8 percent. Should China's geopolitical situation break down, the economic ramifications would likely be felt broadly throughout the world's economy.

India also faced serious problems with poverty, even in happier economic times. Now analysts wonder whether unrest could broaden in an economic downturn. Another major challenge for New Delhi is neighboring Pakistan, which faces some of the most serious economic tests of any country in the region. Should Pakistan's political situation devolve, analysts anticipate damaging consequences for India. Russia, meanwhile, has been tested by falling oil prices-the Wall Street Journal reports that the steep recent decline could be problematic for the Kremlin, given the major role economic revitalization has played in bolstering Vladimir Putin's popularity. Declining oil and commodity prices have also tested the economic might of several of Latin America's major players, and economic uncertainty in countries like Bolivia (CSMonitor) and Argentina (Reuters) threatens to destabilize the region more broadly.

Experts say that emerging markets could well determine how far total global economic growth will fall. The Economist, in a recent cover story on the topic, says how emerging markets fare "will determine whether the world economy faces a mild recession or something nastier." Yet the IMF predicts that despite emerging economies' "cooling momentum," they could still act as a source of global economic resilience. Taking this into consideration, the fund estimates that global growth rates will rebound modestly by the second half of 2009. Political unrest could obstruct that bounce, however, so analysts in emerging and advanced economies alike will be keeping a close eye on China and its BRIC counterparts as the current turmoil unfolds.